Payday loans

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1. What are payday loans?

Payday loans are a type of ”high-cost, short-term credit”. You borrow between £50 and £1000 and pay back the loan with interest, in one payment, on or shortly after your next payday.

There are other types of short-term lending, including:

instalment loans - payments are spread weekly or monthly over several repayments, typically between three and twelve months

‘running credit’ or ‘flex credit’ – these work similar to a bank overdraft, where borrowers are given a ‘limit’ that they can draw up to as and when they need to, provided they pay at least the interest off each month. Whilst the credit agreement has no fixed end date, this type of credit is expensive and is intended for short-term use only.

These kinds of credit tend to be more expensive than other types of credit and customers who use them may have limited access to cheaper forms of borrowing.

2. Types of complaint we see

We get complaints from customers who tell us that lenders:

lent them money without checking if they could afford it and now they have a lot of extra interest and charges that they can’t payday

3. What we look at

Like all lenders, short-term lenders need to make sure that they’re giving credit in a responsible way. They need to complete reasonable checks to make sure you can afford to repay a loan before agreeing to it.

There’s a range of information that lenders could use as part of their checks, including a borrower’s income, regular outgoings, their borrowing and repayment history with that lender, and their broader use of credit (for example reviewing a credit report).

There wasn’t a set list of these checks that a lender had to complete. But we’d expect a lender to have gathered more information – and more evidence of the figures being used– where:

the loan repayments took a larger proportion of your income

you were repeatedly coming back for more money

the length of the loan / total amount repayable was higher

On the other hand, we might agree that it’s proportionate for a lender to have gathered less information if you hadn’t already needed to borrow from them before, your loan was for a shorter period, or where the repayment was a small proportion of your income.

Based on the complaints we’ve seen so far, we think unfairness most often occurs where lenders haven’t completed good enough affordability checks before lending and where lenders repeatedly give or extend loans to customers who can’t repay once and for all.

4. How to complain

If you’ve borrowed money and you feel you’ve been treated unfairly by a lender, the first step is to contact them and explain why you’re unhappy.

If you don’t get a response to your complaint - or you’re unhappy with response - you can ask us to investigate. And if you’re not sure where to start, get in touch with us and we’ll do what we can to help.

5. Putting things right

If we think something has gone wrong with your short-term lending, and you’ve lost out as a result, there are a range of things we might ask a lender to do to put things right, depending on the circumstances:

refund the interest and charges you’ve paid

add 8% simple interest

adjust any outstanding balances, if they still exist

update your credit file

make an appropriate payment where we think you’ve suffered particular distress or inconvenience as a result of the lender’s actions

6. Case studies

Not long after Catherine took out her loan, she crashed her car. She had serious injuries, including her hearing being permanently damaged. She contacted the lender to say she’d been in hospital the day the loan was due, and that she’d need more time.

Catherine didn’t hear anything from her lender for a couple of weeks. Then she got a reply asking her to phone them. But she couldn’t call because of her hearing.

Catherine had to give up work and her disability benefit wasn’t enough to pay back the loan. As soon as she got home, she emailed the lender to try to work things out. But the lender responded by telling her that she needed to call them. They finally sent her an income and expenditure form, but this asked her to pay amounts that she couldn’t afford.

Catherine was worried about the impact on her credit file. She was also concerned about whether she’d be able to get credit in the future. She contacted the ombudsman to help.

What we did

We asked Catherine to send us the emails she’d sent to the lender. The lender should've taken Catherine seriously when she said she couldn’t call. Catherine couldn’t hear anything, so the lender should’ve found another way to communicate with her.

We also looked at her income and expenditure form, and agreed that she couldn’t have paid her bills if she’d given the lender what they’d asked for.

We asked the lender to:

take off all the interest and charges they’d applied after Catherine told them she wasn’t working

email Catherine to help her work out a monthly payment she could afford